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The Conditional Sale Doctrine in a Post-Quanta World and Its Implications on Modern Licensing Agreements

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The Conditional Sale Doctrine in a Post-Quanta World and Its Implications on Modern Licensing Agreements THE JOHNIMARSHALL REVIEW OF INTELLECTUAL PROPERTY LAW THE CONDITIONAL SALE DOCTRINE IN A POST-QUANTA WORLD AND ITS IMPLICATIONS ON MODERN LICENSING AGREEMENTS WILLIAM LAFUZE, JUSTIN CHEN AND LAVONNE BURKE ABSTRACT The exclusive rights of a patent owner to exclude others from making, using, or selling patented inventions are limited by the doctrine of patent exhaustion. This doctrine, also known as the first sale doctrine, states that upon the first authorized sale of a patented article in the United States, the article is removed from the patent monopoly, thus losing its patent protection. As a result of this first sale, any subsequent use or sale of the patented article is not an infringement of its corresponding patent. The Federal Circuit further established the conditional sale doctrine in Mallinckrodt, Inc. v. Medipart, Inc., stating that patent owners could impose conditions in a patent license and enforce such provisions with patent infringement claims. The Supreme Court however, held in Quanta Computer, Inc. v. LG Elecs., Inc., that LG Electronics' patent rights were exhausted due to an unconditional license. The Court's opinion left the conditional sale doctrine unaddressed. In failing to mention the Mallinckrodt case in its Quanta opinion, the Supreme Court left the status of the conditional sale doctrine unclear. The most efficient legal framework for reconciling the Quanta ruling with the conditional sale doctrine, leaves the scope of the conditional sale doctrine intact and serves the core purposes of patent law, while helping to "promote the Progress of Science and the useful Arts." Copyright C 2011 The John Marshall Law School Cite as William LaFuze, Justin Chen and Lavonne Burke, The Conditional Sale Doctrine in a Post-Quanta World and Its Implications on Modern Licensing Agreements, 11 J. MARSHALL REV. INTELL. PROP. L. 295 (2011). THE CONDITIONAL SALE DOCTRINE IN A POST-QUANTA WORLD AND ITS IMPLICATIONS ON MODERN LICENSING AGREEMENTS WILLIAM LAFUZE, JUSTIN CHEN AND LAVONNE BURKE INTRODUCTION.......................................................296 I. BACKGROUND & HISTORY..............................................297 A. Patent Exhaustion Doctrine......................................297 1. Bloomer v. McQuewan.......................................298 2. Adams v. Burke....................... ...................... 299 3. Henry v. A.B. Dick Co........................ ................ 299 4. Motion Picture Patents Co. v. Universal Film Mfg. Co...............300 5. United States v. Unicis Lens Co......... ...................... 301 6. Pre-QuantaInterpretation...................................303 B. Conditional Sale Doctrine.......................................303 1. Mallinckrodt, Inc. v. Medipart, Inc........ ..................... 303 2. B. Braun Med. Inc. u. Abbott Labs .............................. 305 I. QUANTA COMPUTER, INC. v. LG ELECS, INC. .............................. 306 A. Facts........................................................306 B. The Cours Analysis.............................................308 III. CURRENT STATUS OF THE CONDITIONAL SALE DOCTRINE...................309 A. Qanta Did Not Explicitly Overrule the Conditional Sale Doctrine.............309 B. Methods of Interpreting Quanta ................................... 310 1. Conditional Sale Doctrine Only Affects Direct Purchasers............. 310 2. QuantaApplies to "Complex Inventions".........................311 3. Footnote Seven Controls. ..................................... 311 4. The Court's Concluding Paragraph..... ............... ......... 312 IV. THE PROPER INTERPRETATION..............................................313 A. The Utilitarian Focus of the Court's Jurisprudence.............. ......... 313 B. The Conditional Sale Doctrine Leads to Greater Efficiency in High Technology Industries...........................................314 C. The Conditional Sale Doctrine Should Not Be Affected by Q .anta.......315 D. Modern Licensing Suggestions Post-Qanta ......................... 316 V. CONCLUSION......................................................317 295 [11:295 2011] The John Marshall Review of Intellectual Property Law 296 THE CONDITIONAL SALE DOCTRINE IN A POST-QUANTA WORLD AND ITS IMPLICATIONS ON MODERN LICENSING AGREEMENTS WILLIAM LAFUZE, JUSTIN CHEN AND LAVONNE BURKE* INTRODUCTION Under federal law of the United States of America, a patent owner is granted rights to exclude others from making, using, or selling patented inventions within the geographical reaches of the United States.' This exclusive right, however, is limited by the doctrine of patent exhaustion, which states that upon the first authorized sale in the United States of a patented article, the article is removed from the patent monopoly and thus loses its patent protection. 2 As a result of this first sale, any subsequent use or sale is not an infringement of the patent. 3 The theory of patent exhaustion, its history, and its application to modern licensing and sales following the Supreme Court case of Quanta Computer, Inc. v. LG Elecs., Inc.4 will be examined in this article. Historically, in patent law jurisprudence, a "conditional sale" is a sale in which the patentee restricts the post-sale rights of a purchaser to use the patent article through an enforceable contract.5 Prior to Quanta, the Court of Appeals for the Federal Circuit ("Federal Circuit") precedent stated that a conditional sale could prevent patent exhaustion and preserve the patentee's right to sue for infringement if the conditions of the sale were not met or violated. 6 The Court's decision in Quanta failed to address conditional sales, and therefore, seemed to go directly against Mallinckrodt, Inc. v. Medipart, Inc.,7 a landmark case where the Federal Circuit held that patent owners could impose conditions in a patent license and enforce them * C William LaFuze, Justin Chen and Lavonne Burke 2011. William LaFuze is a partner in the Intellectual Property practice group of Vinson & Elkins, LLP. Justin Chen and Lavonne Burke are Intellectual Property attorneys in Vinson & Elkins, LLP's Houston office. 1 See 35 U.S.C. § 271(a) (2006) ("[W]hoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefore, infringes the patent."). 2 See Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 625 (2008) (stating "the initial authorized sale of a patented item terminates all patent rights to that item"). 3 See id. 4 Id. at 617. The Supreme Court issued its opinion in Quanta on June 9, 2008. Id. In the case, L.G. Electronics ("LGE") licensed its patent portfolio to Intel but placed several restrictions on the use of the patents. Id. at 623. These restrictions were intended to be effective against computer manufacturers who purchased Intel computer chips which incorporated LGE's patents. Id. at 636. Subsequently, LGE sued several manufacturers (including Quanta) for violating these license restrictions after purchasing the computer chips from Intel. Id. at 624. The Supreme Court ultimately held that LGE's patent rights had been exhausted in the sale of Intel computer chips, citing the patent exhaustion doctrine. Id. at 638. 5See Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 703-04 (Fed. Cir. 1992). 6 See B. Braun Med. Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed. Cir. 1997); see also Mallinchrodt, 976 F.2d at 707, 709 (noting that when a patentee sells a machine without any conditions, consideration has been paid and he no longer has his exclusive right). 7 Mallinchrodt, 976 F.2d at 700. [11:295 2011] The Conditional Sale Doctrine in a Post-QuantaWorld 297 and Its Implications on Modern Licensing Agreements through a patent infringement claim (the conditional sale doctrine).8 The Supreme Court however, made no mention of Mallinckrodt in its opinion and left the conditional sale doctrine primarily unaddressed. 9 As a result of the Court's narrow ruling in Quanta, the status of the Federal Circuit's judicially-created conditional sale doctrine will be evaluated as described below. Part I of this article will discuss the history behind the patent exhaustion and conditional sale doctrines, as well as the current formulations of both. Part II will give a detailed background of the Quanta case and describe the legal reasoning used to support various interpretations of Quanta. Part III will examine different methods of interpreting the Court's opinion in light of previous conditional sale doctrine jurisprudence and evaluates varied arguments in support of keeping the conditional sale doctrine intact. Finally, Part IV of this article will analyze the Court's methods of interpretation and propose strategies for incorporating post-sale restrictions in modern licensing and sales agreements in an attempt to prevent exhaustion and preserve the right to sue. I. BACKGROUND & HISTORY A. Patent Exhaustion Doctrine The patent exhaustion doctrine, also known as the first sale doctrine,o10 was first articulated by the Supreme Court in 1852 in Bloomer v. McQuewan.11 The doctrine of patent exhaustion provides that any authorized sale of a patented item terminates all patent rights to that item. 12 The Court, in support of its finding that patent term extensions did not affect the rights of purchasers of patent licenses 13, stated that "when [a] machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly." 14 Twenty years
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